July 27, 2013

China takes steps to curb overcapacity

Officials: Excess production drives down prices of industrial goods and puts companies' profits at risk.

Bloomberg News

BEIJING - China ordered more than 1,400 companies in 19 industries to cut excess production capacity this year, part of its efforts to shift toward slower and sustainable economic growth.

Steel, ferroalloys, electrolytic aluminum, copper smelting, cement and paper are among areas affected, the Ministry of Industry and Information Technology said in a statement Thursday, in which it announced the first-batch target of this year to cut overcapacity. Excess capacity must be idled by September and eliminated by year-end, the ministry said, identifying the production lines to be shut within factories.

China's extra production has helped drive down industrial- goods prices and put companies' profits at risk, while a survey this week showed manufacturing weakening further in July. Premier Li Keqiang has pledged to curb overcapacity as part of efforts to restructure the economy as growth this year is poised for the weakest pace since 1990.

"This is a real move and is very specific compared with previous high-level conceptual framework for economic restructuring," said Raymond Yeung, a Hong Kong-based economist at ANZ Banking Group Ltd. "They maintain the overall tone that they're not focusing on the quantity of growth but the quality of growth."

The move also reflects that Li has settled in the job and is willing to deepen the reform on overall economic structure, which he promised after taking over the premiership in March, Yeung said.

The Shanghai Composite Index fell 0.4 percent as of 2:25 p.m., while Hong Kong's Hang Seng China Enterprises Index of mainland companies dropped 0.2 percent.

More than 92 million tons of excess cement capacity and about seven million tons of excess steel production capacity are expected to be wiped out under the government's plan, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote Thursday. Nomura maintained its forecast of 7.4 percent economic growth for China in this quarter and 7.2 percent in the fourth quarter.


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